A legal battle in London has revealed that a conglomerate controlled by Anil Ambani, the Indian telecoms tycoon, used a Mauritius-based fund to make covert investments in one of its own companies, triggering calls in India for a full investigation.
U.K. regulators have found that Mr Ambani’s Reliance Group, spanning interests from financial services to infrastructure, invested $250m in the offshore fund that in 2007 bought securities linked to one of the companies within the group, in violation of Indian law.
The complex chain of investments, long the subject of media speculation in India, is now at the center of a disciplinary action brought by the U.K.’s Financial Services Authority against the former private bankers at UBS who set up the investment fund.
The long-running case has already established serious compliance failings at UBS, the Swiss bank whose flagship wealth management arm competes fiercely for the business of billionaires such as Mr Ambani. The bank paid an £8m fine in 2009 for control weaknesses on its “Asia II” private banking desk based in London, which dealt with “mega clients” such as Mr Ambani and several other Indian tycoons.
So far, only Mr Ambani’s group has been publicly identified as using this structure. But one Indian investor with knowledge of the vehicle claimed that as many as 25 Indian businessmen had used similar funds.
One former senior UBS private banker, Jaspreet Ahuja, last week accepted a £150,000 fine for facilitating the $250 million investment by three Reliance group companies into a Mauritius-based vehicle; his manager, Sachin Karpe, is challenging a proposed £1.25 million penalty over the same events in a London tribunal.
But the FSA’s finding that the fund, known as “Pluri Cell E”, subsequently invested in “Indian-listed equities and derivatives” of another company in the Reliance Group stable raised fresh questions about the structure, legal experts said.
Mr Ambani remains one of India’s most high-profile business leaders. His empire was forged from the division of the original Reliance group, established by his father, after a protracted battle with his elder brother, Mukesh, in 2005.
Under Indian law, Indian nationals and companies are not allowed to invest in domestic stocks through the vehicles at issue in this case except in limited circumstances.
Mr Ambani is not party to the UK tribunal and has not been charged by the FSA with wrongdoing. He denies any knowledge – or authorization – of the transaction. In India, Mr Ambani, several Reliance Group directors and two Reliance companies paid 500 million rupees ($11 million) to the country’s financial regulator, the Securities and Exchange Board of India, in January to settle an inquiry into whether they violated overseas borrowing rules and misrepresented financial statements. They did not admit liability.
However, two legal experts contacted by the Financial Times, speaking on condition of anonymity, said that while Mr Ambani had been investigated by SEBI, some of the corporate activities examined by the UK’s FSA could also raise concerns at the Reserve Bank of India.
Using an offshore fund covertly to invest in companies in which an individual or group already holds a significant interest without declaring it would violate both SEBI and RBI rules, experts said.
A former senior Indian official, also speaking on condition of anonymity, said: “The Reserve Bank of India has always been against Indian corporates raising money abroad and then pumping those funds into their own companies ... The Ambani case, as well as many others, should be properly investigated and the Right to Information Act should be used to open up cases which have been closed or settled.”
India’s powerful RTI legislation provides citizens with broad rights to access information held by government ministries and agencies. The law is widely respected, and is also backed by stiff fines for the improper withholding of information.
According to the documents published by the FSA last week, Pluri Cell E bought derivatives, known as equity swaps, whose underlying shares referenced an unnamed Reliance company. Separate documents published by SEBI in 2010 name Pluri Cell E as the ultimate beneficiary of derivatives whose underlying security was Reliance Communications, one of India’s largest mobile operators.
While former UBS bankers arranged the investment, UBS compliance officials did not know the ultimate owners of the Pluri vehicle were companies within the Reliance group, and never signed off on the investment, the FSA found.
In January 2007, Pluri Cell E closed out its swaps and bought global depositary receipts in the same Reliance company, according to the FSA. These were worth $300 million by the end of October 2007. GDRs are securities issued by non-UK companies that are listed on the London Stock Exchange and track underlying domestic shares.
The FSA maintained that $250 million was invested in Pluri Cell E from December 4, 2006 until October 9, 2007. During this period, Reliance Communications shares rose from 443.80 rupees to 706.95 rupees, according to Bloomberg data.
At that time, the company entered into a bidding war for its rival, Hutchison Essar, which was ultimately acquired by Vodafone in February 2007. However, Reliance’s offer was all cash and would not have been directly affected by the rise in the company’s share price.
The FSA’s findings were published in the penalty notice issued last Friday against Mr Ahuja, who worked with Mr Karpe on setting up the Pluri investment.
While the notice against Mr Ahuja did not identify the client, the disciplinary case against Mr Karpe, which is continuing, had already named the client as Mr Ambani’s Reliance Group.
A spokesman for the Reliance Group drew a distinction between corporate and individual responsibility, emphasizing that investments with UBS had been made by companies, not Mr Ambani himself. He said there was no regulatory charge that Mr Ambani used Pluri Cell E to invest in his own company.
“Whether or not some of the companies in the group made structured investments of that nature; the legal implications thereof; and the circumstances in which such investments came to be made; are an entirely separate matter, which has already been settled with Indian regulators,” the spokesman said.
Both Mr Ahuja and Mr Karpe have claimed that senior UBS officials were aware of their activities on behalf of Reliance Group, and that the structure used in the Pluri investment had been used previously for other clients.
It emerged during Mr Karpe’s tribunal hearing that Kurt Kumschick, formerly one of UBS’s top private bankers in Asia who died earlier this month, told Mr Karpe and Mr Ahuja that Mr Ambani’s status as a “mega client” may justify setting up the investment.
“If the ultimate [owner] is our mega client ... then it will be a business decision if we are comfortable with the structure and want to go ahead with this transaction or not,” he wrote in an email in 2007.
“I would support the decision to go ahead based on the following: [...] our mega client is among the top three industrialist [sic] in India with enormous influence in the country and able to interact with regulators and authorities.”
UBS denies any of its executives sanctioned the Pluri investment, and is supporting the FSA’s case against Mr Karpe.
Bernhard Buchs, UBS’s global head of wealth planning, testified in Mr Karpe’s tribunal last week that the bank stopped structuring offshore vehicles for clients that wanted to invest in Indian stocks in 2005, after regulations in India “evolved”.
Additional reporting by James Fontanella-Khan